Supreme Court Arbitration Rhetoric v. Reality and AT&T

Lawyers keep telling clients that arbitration is a matter of contract, not coercion. That follows Supreme Court rhetoric that’s belied by Supreme Court practice. The Court’s pending case in AT&T Mobility v. Concepcion gives the Court a final chance to resolve the gap between its talk and action concerning arbitration.

I doubt, however, the Court will seize the opportunity. Instead, the Court likely will continue to tell us that its arbitration jurisprudence is merely applied contract law, while its applications will continue to coerce people into arbitration because the Court has established a national policy favoring arbitration.

That is the lamentable assessment provided in my new article on the subject, Rhetoric versus Reality in Arbitration Jurisprudence: How the Supreme Court Flaunts and Flunks Contracts (and Why Contracts Teachers Need Not Teach the Cases).

As with practicing lawyers, legal scholars have generally ignored this rhetoric-reality gap too, many routinely repeating that arbitration is all about contract (a notable exception is David Horton). As a teacher of Contracts for 20 years, I began to hear this rhetoric last summer, beginning with my receipt of a reprint of an Illinois Law Review article by noted arbitration scholar Thomas Stipanowich.

In a comprehensive review of the state of arbitration law and practice, the piece criticized editors of Contracts casebooks for paying too little attention to arbitration and especially to how the attention given was often extremely negative. With modest exceptions, including in Ian Ayres’ casebook, Contract law books and courses have not generally treated arbitration much and the treatment often is in the context of illustrating doctrines like unconscionability or lopsided terms not comporting with reasonable expectations of a community.

I began following pending Supreme Court cases on the subject and scrutinizing those handed down in preceding terms. I found the talk about contracts and contract law intriguing because it made it sound as if arbitration was at the center of contract law and that contract law was at the center of arbitration law. That made it seem irresponsible for me, Contracts casebook editors, and other teachers, to leave arbitration at the margins of the Contracts course or outside it altogether.

Alas, the truth is that contract and contract law have so little to do with what happens in arbitration jurisprudence, particularly compared to Court rhetoric, that it would confuse or mislead students taking Contracts to provide it as an illustration. To that extent, arbitration warrants the glancing treatment in the Contracts course it gets, followed by an optional upper-level course.

Among the many costs of the Court’s rhetoric-reality gap are those manifest in the AT&T case, on which the Court is now struggling to write an opinion.

In AT&T, the issue is whether California unconscionability law applies to “any contract,” within the meaning of the Federal Arbitration Act as the Court construes it. The case involved a form contract where a consumer claimed a fraud of $30 and sought to wage a class arbitration—which a contract clause barred. California precedents classify as unconscionable procedurally-adhesive clauses that can be used to prevent people from banding together to challenge crooked practices that involve stealing small sums from large numbers of people.

The case shows how the Court’s rhetoric is at war with itself: rhetoric from pure nineteenth century freedom of contract suggests upholding the bar because the clause is in the written agreement; rhetoric about state contract law suggests striking the bar because the written agreement is invalid. The Court’s challenge is thus to state a test of preemption: how to tell if a state’s judges comply with the FAA’s mandate to treat arbitration clauses like other contracts?

At oral argument, the company said it was simple: look at general unconscionability doctrine applied to all contracts and compare it to unconscionability doctrine applied to arbitration clauses. Taking the FAA literally, the company argued that the comparison must be between the unconscionability doctrine applied to arbitration clauses and general unconscionability doctrine applicable to “any contract”—not just other dispute resolution clauses.

This approach reflects how the Court’s jurisprudence induces thinking about the question. Under that jurisprudence, moreover, it is difficult to escape concluding that the doctrine does not apply to “any contract.” It applies to a species of contracts that enable cheating small sums from large numbers of people. But preempting the law and upholding the statute on such grounds would be a strange result. Such a stance suggests that contract law is monolithic and static when in reality it is rich and dynamic.

Beyond rhetoric, it’s not obvious how the Court’s national policy favoring arbitration applies. Simply to favor arbitration does not necessarily answer whether a clause banning class arbitration promotes or retards that policy. But a national policy favoring a particular kind of arbitration—the swift and cheap bilateral form, not the lengthy and costly class form—clearly calls for reversing the lower courts, preempting state contract law that holds such bans unconscionable. And the Court’s national policy favoring arbitration increasingly looks to favor that kind of arbitration, not class arbitration, and certainly not such arbitration as contracting parties may agree to.

The Court would do well to find a more practical and legitimate approach to assessing the validity of state law under the FAA. It would be best to abandon the rhetoric and instead embrace contracts, contract law, and federalism. The first principle would be federal deference to state courts and state contract law. That could be subject to qualifying principles to catch subterfuge based on an objective determination about a state’s faithfulness to the FAA. States would be freer to develop contract law for application across settings, including to contracts with arbitration clauses.

Citizens could rely on venerable principles of freedom of contract (and freedom from contract) developed in the common law rather than the truncated versions of those doctrines applied underneath the Court’s rhetoric. Alas, the Court’s jurisprudence has not equipped it to reach such a result, which would require retreating significantly from its exuberance for the national policy favoring arbitration. It would be impressive to see the Court make a switch in the AT&T case. But it would also be surprising.

5 Responses

what makes Stok & associates v Citibank worthy of review? Will the Court say prejudice is required for a waiver of arbitration even though prejudice is not required for any other contractual waiver, further detatching arbitration agreements from all other contracts?

I just learned that stok v citibank has settled and as part of the settlement the cert proceedings are dismissed. I think rationalizing the prejudice standard and explaining how that rationalization–whatever it turned out to be–fit into what clearly should be state law would have been very difficult to do. Not that it couldn’t or wouldn’t have been done. But I don’t think it would have been pretty.